BP's controversial alliance with the Kremlin-controlled oil company Rosneft is in tatters after a tribunal backed the company's Russian partners in blocking the deal.

The London tribunal, called to settle the dispute between BP and its Russian oligarch partners AAR over the proposed deal, ruled that the temporary high court injunction preventing it from being consummated should remain in place. The deal involved BP and Rosneft swapping $16bn (£10bn) of shares and forming a joint venture to explore the Arctic for oil.

BP issued a statement on Thursday night saying it was "disappointed" that the deal could not go ahead as proposed and that it would try to proceed with the share swap without forming the Arctic venture.

But it is likely that AAR will also seek to block this plan unless it wins key concessions from BP. AAR owns half of TNK-BP, which is BP's existing joint venture in Russia. AAR claims that BP's proposed rival joint venture with Rosneft breaches the terms of its shareholder agreement governing TNK-BP.

Under the terms, BP is required to offer any business opportunity in Russia to TNK-BP first, rather than pursue it unilaterally. AAR is keen to turn TNK-BP into a global oil major and sees the Arctic joint venture with Rosneft as an opportunity to achieve its ambitions. AAR fears that if the two companies swap shares, even without forming the Arctic venture, it makes it more likely that it will be excluded from future projects in Russia.

AAR's CEO Stan Polovets said: "AAR welcomes the decision of the arbitration tribunal, which we expect BP to honour fully and absolutely."

The ruling from the tribunal is a serious blow to Bob Dudley, BP's new chief executive, who announced the proposed alliance at a press conference in January. Dudley, himself a former chief executive of TNK-BP before he was hounded out of Russia by AAR in 2008, presented the alliance as a transformational deal as the company recovers from the Deepwater Horizon crisis.

It is not clear how BP's investors would view a standalone share swap with Rosneft even if AAR did not succeed in blocking it. BP has raised more than $20bn from asset sales since the Gulf Crisis to focus on boosting production and finding new reserves. Its record in Russia has been marked by disputes with its partners.

BP said it was hopeful that it would be able to resurrect its plan to explore the Arctic. Dudley, along with executives from Rosneft, has pointed out that TNK-BP has no experience of offshore exploration, let alone in an environment like the Arctic, which makes it an unsuitable partner. AAR hopes that the tribunal ruling will persuade both companies to find a way for it to participate.

"BP looks forward to finding a way to resolve its differences with its Russian partners to allow these important Russian Arctic developments to proceed in future," a statement from BP said.

"BP has a long history as a leader in oil and gas exploration and the development of new technologies. BP intends to continue in that role for decades to come as the world looks to satisfy its increasing demand for secure, affordable energy supplies. BP has the scale and experience to use these new technologies to develop frontiers like the Russian Arctic.

"BP is disappointed that these agreements, which are important for Russia, for Rosneft and for BP, cannot for now go ahead in the form intended, due to legal challenge by AAR. BP intends to continue to honour the TNK-BP shareholders' agreement to which it is a party with AAR, and will respect the decision of the arbitrators. BP has always been and remains, fully committed to investing in Russia. TNK-BP is BP's primary business vehicle in Russia and BP fully supports its strategy and investment programme. BP is also continuing with its exploration programme with Rosneft offshore Sakhalin."